Thorn in the Legacy

Indicators: April 14

$1 billionish was the minimum amount of
Thornburg Mortgage securities owned by the Federal Reserve Bank of New
York as of Jan. 29, 2010.

"The audacity of that prick…This guy thinks
he’s got a big dick. He’s got nothing, except maybe a boyfriend…Who the
fuck asked you? You’re not an elected officer. You’re a clerk." —Former
Bear Stearns CEO Jimmy Cayne, speaking of US Treasury Secretary Timothy
Geithner, in William Cohan’s book House of Cards

In 2008, as head of the New York Fed, Timothy Geithner led the first
of the big bank bailouts: the dissection and sale of Bear Stearns to
JPMorgan Chase. It was only on March 31, 2010—nearly a year after
JPMorgan repaid a $25 billion government loan—that the Fed finally
released the details of the Bear “legacy” assets it still owns.

The Bear sale was managed through a Fed-controlled company called Maiden
Lane. In its March 31 press release announcing the sale, the Fed said
it “recognizes the importance of transparency to its financial stability
efforts.” Transparency, however, is not clarity: The list of Maiden
Lane holdings is indecipherable to laymen. That $1 billion Thornburg
Mortgage security, for instance, is described only as “TMST_06-1 AX,”
plus an ID code.

That code reveals which product sold by the now-bankrupt Santa Fe
mortgage company wound up held by the Fed: Thornburg Mortgage Securities
Trust 2006-1, a complex bundle of loans from assorted companies that
was co-managed by Bear and Lehman Brothers, another defunct investment
bank. The lengthy prospectus for the Thornburg security, filed Jan. 20,
2006 with the Securities and Exchange Commission, shows it was
“expected” to be rated as an “Aaa/AAA” investment. The security
consisted of 3,144 loans, mostly for home purchases of between $400,000
and $600,000. (Only 25 went to New Mexico homebuyers.)

The prospectus, which is available to anyone who wants to slog through
it, reveals that only half of the loans packaged in the supposedly AAA
security were made to borrowers who provided “full documentation” of
their income and assets.

The other half included hundreds of millions of dollars in “stated
documentation” and other shaky loans.

Thornburg always claimed it only lent to wealthy “prime” borrowers.
Evidently, it wasn’t so particular about re-selling other lenders’
crappy loans to investors. The security prospectus shows that
approximately 1 in 5 loans were originated and serviced by Countrywide,
whose brand name became a synonym for predatory lending.